NIH Biomedical Research: Agencies Involved in the Indirect Cost Rate-Setting Process Need to Improve Controls
Highlights
What GAO Found
Research organizations that apply for National Institutes of Health (NIH) funding participate in an indirect cost rate-setting process, which involves submitting a rate proposal; reviewing the proposal and having it audited by a third-party agency at the cognizant agency's request; and finalizing (negotiating) the rate for the organization. The Office of Management and Budget (OMB) and the Department of Health and Human Services (HHS) have designated three primary cognizant agencies to set indirect cost rates for federal financial assistance funded by NIH:
- HHS's Cost Allocation Services (CAS),
- NIH's Division of Financial Advisory Services (NIH-DFAS), and
- the Department of Defense's (DOD) Office of Naval Research (ONR).
These cognizant agencies are responsible for ensuring that negotiated indirect cost rates comply with OMB guidance and the Federal Acquisition Regulation (FAR), as applicable.
GAO found that while the three agencies had designed controls for setting indirect cost rates, deficiencies in the design of some of these controls could result in the waste of federal resources. The deficiencies GAO identified are as follows:
None of the three agencies has updated its internal guidance to reflect current OMB guidance or changes in agency requirements, such as documentation requirements.
ONR relies on audits by the Defense Contract Audit Agency to ensure the adequacy and compliance of indirect cost proposals that it processes, but ONR has not included acceptable time frames in its internal guidance for when these audits are to be completed or what steps are to be taken when audits result in qualified opinions or when a prior audit opinion is rescinded.
All three cognizant agencies' internal guidance lacks detailed instructions to supervisors on their review responsibilities over the indirect cost rate process.
CAS and ONR have not developed internal guidance addressing differences in negotiating indirect cost rates with certain types of research organizations, such as universities and hospitals.
ONR and NIH-DFAS have not developed mechanisms to track key milestones for the indirect cost rate-setting process.
If these deficiencies are not addressed, there is an increased risk that these cognizant agencies may not properly and consistently negotiate indirect cost rates and that the rates negotiated may not comply with applicable federal regulations. Thus, there is an increased risk that the indirect cost rates used to reimburse NIH research organizations will include costs that are not allowable, allocable, and reasonable, and may result in wasted federal resources.
Why GAO Did This Study
NIH spent over $23 billion to support extramural research in 2015, including $6.3 billion for indirect costs, which are costs not directly attributable to a specific research project or function, such as utilities expenses, for grants and cooperative agreements. NIH relies on designated cognizant agencies to design adequate internal controls over the processes for negotiating indirect cost rates with research organizations. Once set, these rates must be accepted by NIH and all federal awarding agencies.
GAO was asked to review the internal controls for overseeing the validity of indirect cost rates for NIH's research organizations. This report examines the extent to which the three primary cognizant agencies (CAS, NIH-DFAS, and ONR) that set indirect cost rates on NIH's behalf have designed internal controls to mitigate the potential for fraud, waste, and abuse in the indirect cost rate-setting process. GAO reviewed OMB guidance, the FAR, and the cognizant agencies' internal guidance on indirect cost rate negotiation; interviewed staff at the cognizant agencies; and reviewed a nongeneralizable sample of negotiation case files to obtain an understanding of the design of controls.
Recommendations
GAO is making 12 recommendations to improve controls over their indirect cost rate process. HHS concurred with GAO's 7 recommendations to CAS and NIH-DFAS and described ongoing and planned actions to address them. DOD concurred with 4 recommendations to ONR and partially concurred with 1. GAO continues to believe that action is needed, as discussed in the report.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Division of Cost Allocation | To improve the design of internal controls over the indirect cost rate-setting process, the Director of CAS should establish internal controls to periodically review and update internal guidance when changes are made to applicable regulations to reasonably assure the guidance reflects current requirements. |
HHS concurred with this recommendation. In response, HHS stated that by December 31, 2016, its Cost Allocation Services (CAS) would establish written procedures requiring periodic reviews and updates of internal guidance whenever changes are made to applicable regulations. This guidance is to reflect new federal regulations, grant policy, and other policies having an impact on the review and negotiation of indirect cost rates applicable to colleges and universities, non-profit organizations (including research institutions), and hospitals. On November 2016, CAS updated its internal guidance to reflect the new requirements of the Uniform Guidance and issued an internal policy that requires staff to: (1) monitor changes to applicable regulations; and (2) notify management in writing within 30 days of the publication of the applicable regulations whether internal guidance needs to be revised.
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| Division of Cost Allocation | To improve the design of internal controls over the indirect cost rate-setting process, the Director of CAS should develop a standardized checklist and document procedures in its internal guidance instructing negotiators to use the checklist during negotiation. |
HHS concurred with this recommendation. In response, HHS stated that its Cost Allocation Services (CAS) will update and complete standardized checklists and that staff will be instructed to use these checklists by December 31, 2016. In December 2016, CAS revised procedures by developing and implementing standardized checklists that are to be used by all staff for negotiating indirect cost rates. According to CAS officials, the indirect cost rate proposal cannot be finalized unless the staff completes the checklist in the document management and workflow system.
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| Division of Cost Allocation | To improve the design of internal controls over the indirect cost rate-setting process, the Director of CAS should develop detailed internal guidance for the completion and documentation of supervisory review of the indirect cost rate negotiation process to provide reasonable assurance that key control activities have been performed by the negotiators. |
HHS concurred with this recommendation. In response, HHS stated that by December 31, 2016, its Cost Allocation Services (CAS) will establish a document outlining standardized review procedures for supervisory review of workpapers and rate agreements. In February 2017, CAS developed the Supervisor Review Checklist in their document management and workflow system and required supervisors to complete the checklist when reviewing workpapers and rate agreements.
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| Division of Cost Allocation | To improve the design of internal controls over the indirect cost rate-setting process, the Director of CAS should develop internal guidance for negotiating indirect cost rates with all types of research organizations, including hospitals, as well as universities using the simplified method. |
HHS concurred with this recommendation. In response, HHS stated that its Cost Allocation Services (CAS) will update internal guidance for negotiating indirect cost rates with universities using the simplified method by December 31, 2016. This guidance will include an example under the two types of direct cost bases, a salary and wage base and a modified total direct cost base. CAS will develop internal guidance for negotiating with hospitals as soon as possible. In response to our recommendation, CAS updated its internal guidance for universities and issued new guidance for hospitals in January 2017 and July 2020 respectively. These guidance provided steps for staff to follow when negotiating indirect cost rates under the simplified method for these types of research organizations.
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| Division of Financial Advisory Services | As NIH-DFAS begins formalizing its internal guidance, the Director of NIH-DFAS should update internal guidance to include key characteristics, such as policy number, purpose of the policy, effective date, and approving official, that are normally included in formal policy and procedures. |
HHS concurred with this recommendation. In response, HHS stated that by December 31, 2016, National Institute of Health's Division of Financial Advisory Services (DFAS) will update internal guidance to include key characteristics that are normally included in formal policy and procedures. In response to our recommendation, in June and July of 2017 and June of 2018, DFAS management issued four new policies, which included these key characteristics.
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| Division of Financial Advisory Services | As NIH-DFAS begins formalizing its internal guidance, the Director of NIH-DFAS should develop detailed procedures for the completion and documentation of supervisory review of the indirect cost rate negotiation process to provide reasonable assurance that key control activities have been performed by the negotiator. |
HHS concurred with this recommendation. In response, HHS stated that the National Institute of Health's Division of Financial Advisory Services (DFAS), will develop detailed procedures for the completion and documentation of supervisory review of the indirect cost rate negotiations process. NIH-DFAS has developed draft internal guidance to address the supervisory review of the indirect cost negotiation process. NIH-DFAS plans to finalize these procedures by August 31, 2017. In response to our recommendation, in November 2019, NIH-DFAS developed procedures for the completion, documentation and approval of supervisory review of the indirect cost rate negotiation process.
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| Division of Financial Advisory Services | As NIH-DFAS begins formalizing its internal guidance, the Director of NIH-DFAS should establish a mechanism for tracking key milestones in the indirect cost rate-setting process, such as when indirect cost rate proposals are due. |
HHS concurred with this recommendations. In response, HHS stated that National Institute of Health's (NIH) Division of Financial Advisory Services (DFAS) will establish a mechanism for tracking key milestones in the indirect cost rate-setting process. NIH-DFAS has initiatives underway that include moving from paper to electronic submissions of indirect cost proposals and developing a replacement to its Commercial Rate Agreement Distribution Services website. DFAS is looking into the feasibility of incorporating key milestones into these two major initiatives. NIH-DFAS worked with a contractor to develop a web based system that will establish a tracking system to account for when indirect cost proposal are due from organizations. The original initiative to enable the electronic submission of indirect cost proposals was modified to incorporate this new requirement. NIH-DFAS anticipates the planned date for implementation of this system to be October 1, 2017. As of February 4, 2020, this recommendation is still open because DFAS does not have the "proposal due date" and "extension due date" data fields activated in eFLow, the system that addresses this recommendation. NIH-DFAS updated the system in September 2020 to track the indirect cost proposal milestones-next proposal due date, next delinquent proposal date, extension date (if applicable), and organization's year-end date. These efforts address our recommendation.
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| Office of Naval Research | To improve the design of internal controls over the indirect cost rate-setting process, the Director of ONR should implement the May 2014 policy requiring an annual review of guidance so that internal guidance is updated when changes are made to applicable regulations and procedures to reasonably assure that the guidance reflects current requirements. |
DOD concurred with this recommendation. In response, DOD stated that the Office of Naval Research (ONR) will comply with its requirement for an annual review of its internal policy on negotiating indirect costs. In response to our recommendation, on February 22, 2019, ONR updated its guidance incorporating the Uniform Guidance and applicable regulatory requirements and requiring the annual review of this guidance to reflect the inclusion of current regulations and procedures. Additionally, on November 26, 2018, ONR issued internal guidance requiring the Indirect Cost Branch to implement the ONR-wide May 2014 policy regarding annual review of guidance .
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| Office of Naval Research | To improve the design of internal controls over the indirect cost rate-setting process, the Director of ONR should include in its internal guidance acceptable Defense Contract Audit Agency (DCAA) audit completion time frames and identify supplemental procedures to be performed by negotiators if DCAA cannot perform its audits timely or if DCAA issues a qualified opinion or rescinds one of its previously issued audit opinions, to reasonably assure that the indirect cost rate proposal has been adequately reviewed and the negotiated rate complies with applicable regulations. |
DOD concurred with this recommendation. In response, DOD stated that the Office of Naval Research's (ONR) internal guidance will be updated to provide more realistic audit report due dates and will include general procedures to be performed by negotiators in the case of untimely audits, qualified opinions, or rescinded opinions. In response to our recommendation, on February 22, 2019, ONR updated its guidance to provide more realistic audit report due dates and include general procedures to be performed by negotiators in the case of untimely audits, qualified opinions, or rescinded opinions.
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| Office of Naval Research | To improve the design of internal controls over the indirect cost rate-setting process, the Director of ONR should develop detailed procedures for the completion and documentation of supervisory review of the indirect cost rate negotiation process to provide reasonable assurance that required certifications and assurances are obtained and follow-up with the research organization is documented. |
DOD partially concurred with this recommendation. DOD did not agree that the Office of Naval Research (ONR) lacks procedures to ensure supervisors confirm that negotiators adequately performed and documented key controls. DOD noted that both the primary and secondary supervisors are required to review and approve the Business Clearance Memorandum, which records steps performed by the negotiator. While we agree that the Business Clearance Memorandum documents steps performed by the negotiator, these steps are documented at a high level and do not include detailed procedures for supervisors to follow to reasonably assure that the negotiator has performed and documented all key control activities, such as obtaining all required certifications and assurances. DOD agreed in its response that ONR's Business Clearance Memorandum can be improved and stated that ONR will update it to require the negotiator to cross-reference the review steps to the proposal to facilitate the supervisor's review process. However, it is not clear whether the planned Business Clearance Memorandum revisions will include providing detailed procedures for supervisory review as we recommended. In response to our recommendation, in September 2016 , ONR updated its business clearance memorandum, which require the negotiators to cross reference their review steps to the indirect cost rate proposal in order to facilitate the supervisor's review process for ensuring that negotiators have performed and documented key controls.
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| Office of Naval Research | To improve the design of internal controls over the indirect cost rate-setting process, the Director of ONR should finalize and issue internal guidance for negotiating indirect cost rates with universities and nonprofit organizations, including establishing a time frame for issuance of the internal guidance, to help ensure that the procedures are implemented in a timely manner. |
DOD concurred with this recommendation. In response, DOD stated that the Office of Naval Research (ONR) is currently updating its internal guidance and currently plans to issue this guidance by December 31, 2016. In response to our recommendation, on February 22, 2019, ONR updated their guidance to include specific procedures related to negotiating indirect costs with universities and nonprofit organizations.
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| Office of Naval Research | To improve the design of internal controls over the indirect cost rate-setting process, the Director of ONR should update ONR's existing process for tracking key milestones in the indirect cost rate-setting process to include information such as when indirect cost rate proposals are overdue and when DCAA's audit reports are due. |
DOD concurred with this recommendation. In response, DOD stated that the Office of Naval Research will update its existing processes for tracking key milestones to include information such as due dates for rate proposals and DCAA audit reports. In response to our recommendation, in beginning of fiscal year 2017, ONR updated it systems to generate reports that track these milestones for indirect cost rate data.
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